The General Anti Avoidance Rule (GAAR)- proposed by the then Union Finance Minister Pranab Mukherjee during the annual budget 2012-13- is anti-tax avoidance rule, drafted by the Union Government of India, which prevents tax evaders, from routing investments through tax havens like Mauritius, Luxemburg, Switzerland.

Tax havens are countries which have low tax regimes which provide individuals and business opportunities of tax avoidance or tax evasion.

In India, SAAR is getting followed i.e. Specific Anti-Avoidance Rules. However, now Indian tax authorities want to move to the legislation of GAAR as there exists lot of specific loopholes.

The Indian tax law has showed his concerns of tax avoidance and tax abuse and has taken an initiative to introduce GAAR, so as to increase the tax collections in India as tax avoidance is an area of concern across the world. Thus, GAAR is a set of general rules enacted so as to check the tax avoidance.

This article discusses the evolution of General Anti-Avoidance Rules (GAAR) and its benefits over Specific Anti-Tax Avoidance Rules (SAAR).

GAAR:

The full form of GAAR is: General Anti-Avoidance Rules.

GAAR is a concept which generally empowers the Revenue Authorities in a country to deny the tax benefits of transactions or arrangements which do not have any commercial substance or consideration other than achieving the tax benefit.    Whenever revenue authorities question such transactions, there is a conflict with the tax payers.   Thus, different countries started making rules so that tax can not be avoided by such transactions.

GAAR is wide sweeping in nature and can encompass all kinds of schemes, structures, transactions that could be used to avoid taxes.

The invocation of GAAR requires two essential conditions to be fulfilled:

1. 1.      The arrangement or part thereof should be to obtain a tax benefit,
2. 2.      The arrangement or any part thereof should be one which would normally not be done between independent parties at arm’s length or is not ordinarily done for bona fide purposes.

However, other provisions of GAAR with regard to taxation of investors routing investments through tax havens may not be relaxed. The finance ministry is firm that any investment through a low-tax or no-tax jurisdiction, made by an investor from another country mainly to obtain tax benefit, would not be spared by the tax department. Thus, proposals to include all kinds of foreign investments, including portfolio investments, and treaty overriding provisions may remain.

SAAR:

The full form of SAAR is: Specific Anti-Avoidance Rules.

 The SAAR is a set of rules which target specific “known” arrangements of tax avoidance having very limited scope of application which generally do not grant any discretion to the tax authorities.

 

Benefits of GAAR over SAAR:

• Obtaining tax benefit is the main purpose of GAAR over SAAR unless otherwise proved by the taxpayer.
• Rules will not be specific to any country or asset class; will be applicable to all foreign portfolio investment.
• Onus to prove whether it’s a case of tax avoidance or not will be on the tax department, not the taxpayer.
• SAAR deny treaty benefits if main purpose of creation of an entity is to obtain treaty benefit that would not otherwise be available or, deny treat benefits to a legal entity not having bonafide business purpose, or allow application of domestic provision to prevent tax evasion which is taken over GAAR.
• GAAR has a broader application resulting in it being interpreted in a more extensive manner.
• GAAR necessarily involves granting discretion to the tax authorities to invalidate arrangements as impermissible tax avoidance.

Procedure for applying GAAR

The power to invoke GAAR is bestowed only upon the Commissioner of Income Tax (CIT). For this purpose, the Code empowers him to call for such information as may be necessary. He is also required to follow the principles of natural justice before declaring an arrangement as an impermissible avoidance arrangement. He will determine the tax consequences of such impermissible avoidance arrangement and issue necessary directions to the Assessing Officer for making appropriate adjustments. The directions issued by him will be binding on the Assessing Officer.

To invoke GAAR provisions, the assessing officer will have to make a reference to the commissioner, who upon hearing the taxpayer will refer the matter to the approving panel if the reply is not satisfactory. It is proposed that the approving panel would comprise tax officers of the rank of commissioner or above. The ministry may now consider including somebody from the judiciary in the panel.

Conclusion:

General Anti-avoidance Rule (GAAR) is a concept which generally empowers the Revenue Authority in a country to deny tax benefit of transactions or arrangements which do not have any commercial substance and the only purpose of such a transaction is achieving the tax benefit. The need for a GAAR is usually justified by a concern that the integrity of the tax system needs to be strengthened.

It is crucial to ensure that after GAAR`s introduction the tax system does not fall into disrepute. That is why the GAAR must be administered transparently and it would be a better approach to introduce the GAAR in a phased manner.

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